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Monday, October 20, 2008

Crystal Ball Edition

Yes the $64,000 question..what is going to happen!!!?!?! Well I am no expert but I have some thoughts...

I think the United States- and whatever else people disagree on I think there is a concensus on this- is going through a crisis in its political leadership product not just of Bush's incompetence but also a paralysis/gridlock in government product of an almost perfect democratic/republican split since 2000. Once Barack Obama is elected president I have to believe that we will see a boost in confidence on the part of americans. At this point however people are depressed and unhappy about the direction of the country- particularly the economy- and they are not spending and as you know when people here in consumerland stop spending everything grinds to a halt. There is also less spending because there is a contraction in credit with people, for example, finding it harder to get bank loans to buy cars...This is all compounded by a sizable drop in home values which is making everyone feel poorer...

However, we have not yet even began to see the full impact of this reduction in spending/contraction in credit work its way through the economy as it has really only been happening in full for the past couple of weeks.. Anecdotically - on the street- you hear a lot of "I am cutting down on my spending" and "I was going to but now because of the economic crisis.." when in reality there is still little direct impact on many Americans but this very cutback on the part of most americans is what is going to make sure that we do go into a deep recession with pain... This is going to come though particularly around the end of the holiday season and particularly the first quarter of 2009 (nice inauguration present for obama). I have to believe we will have retail numbers being announced for Christmas that will be abysmal and this will feed the pessimism- of course by this point Obama will have been elected with a clear mandate and this should counteract the pessimism somewhat- I would not be surprised to see some sort of active early transition or at least involvement of Obama's economic team....

Of course the government is trying to combat this drop in consumer confidence and spending by injecting as much liquid as it can but that too will take time to work its way through...

In as far as the longer term questions of how the US gets its financial house in order I have to believe we are heading -eventually- for a reduction of defense spending..There is also concensus about the need to move up the retirement age (to improve the social security segment of the budget) but we will have to see if that can be done).. But we are essentially heading towards the end of the American "Empire".. Pat Buchanan- who for every strange idea has many more with common sense- just wrote a column about how the US can no longer afford its empire... Too much of the government spending cannot or will not be cut leaving defense as the necessary source of cuts.. I think America's creditors and the international financial community are going to want to see some seriousness on the part of Obama because they are becoming worried about the mess that has developed and this fantasyland debate about lowering everyone's taxes along with increasing government expenditure on bailouts etc has to be scaring them a bit..

Having said all that, I am optimistic that once Obama wins he will be able to provide people with some confidence that they have a government.. the problem currently is that there is no real government.. Bush is pretty much absent and there is no confidence in him or his administration - or their policies- so we are waiting on standby for the new president while we debate whether Obama is a socialist, terrorist, or what....I think the fact that the democrats will have control in both houses of congress means he should be able to take the necessary steps and more importantly perhaps give people the impression that somebody is in charge at the helm and is steering the ship... I also expect Obama to appoint a team of very competent, trusted, and experimented people to run the economy and signal Wall Street to get on board.. I am thinking of people who already proved their bonafides under Clinton (Rubin, etc..).

There is a lot of doom and gloom around here but I continue to think that the US economy is very dynamic and that the necessary adjustments will be made... There will be a period of time until the recession fully takes hold and then there will be an additional period of time until the measures taken by government work themselves through the economy but in the end I just don't see this being anything on the order of what is being talked about (i.e., a new "great depression", etc.).

Obviously there are real problems with the mortgages, the deficits, etc.. but ultimately I think this is more about a lack of trust on the part of Americans and US creditors..It is that lack of confidence that is the biggest problem and as Alsogaray would have said we need a "shock"!

These are my scattered thoughts but I remain optimistic for the medium term and although the challenges are sizable I wouldn't bet against the United States just yet.....No doubt my optimism is to a large extent influenced by my belief that Obama is going to win the presidency..

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